Foreign currency index

ABSTRACT

Systems and methods are provided for trading and calculating the composition of foreign currencies indexed financial instruments. The compositions of the financial instruments are determined by calculating a geometric average of the exchange rates of foreign currencies with corresponding competitive weights. The competitive weights for each of the foreign currencies reflects competition between the goods of the United States and a country corresponding to the foreign currency in the markets of third countries.

This application relates to and claims priority from U.S. ProvisionalApplication Ser. No. 60/422,766, filed Oct. 31, 2002, the entiredisclosure of which is hereby incorporated by reference.

FIELD OF THE INVENTION

The present invention relates to foreign currency index financialinstruments. More particularly, the invention relates to foreigncurrency index financial instruments that have a value determined by atrade weighted geometric average of currency prices

DESCRIPTION OF THE RELATED ART

Foreign currency indexes have been used for a variety of purposes, suchas aids in analyzing the price competitiveness of domestic goodsrelative to foreign goods, the effect of foreign economic and financialdevelopment on the domestic price level, and the demand for domestic andforeign currency assets. Conventional indexes have included weightedformulas that are functions of exchange rates.

The well-known G-10 (Group of Ten) index maintained by the Board ofGovernors of the U.S. Federal Reserve System was designed principally tomeasure competitiveness in world markets. The G-10 index is a functionof six currency values and corresponding weights. The weights were fixedin 1976 and have not been adjusted to reflect current conditions.

The Board of Governors of the U.S. Federal Reserve System replaced theG-10 index with a set of new indexes, including the Major CurrencyIndex. The Major Currency Index was designed principally to measurecompetitiveness in world markets and to serve as a gauge of financialpressures on the U.S. dollar. The index uses weights that are aggregatesof three sub-measures. The three sub-measures are: competition betweenthe goods of the U.S. and country k in the U.S.; competition between thegoods of the U.S. and country k in the home market of country k; andcompetition between the goods of the U.S. and country k in the marketsof third countries. The relative weights are typically calculatedannually by the Board of Governors of the U.S. Federal Reserve System.

The recalculation of weights with the Major Currency Index makes theMajor Currency Index an improvement over the G-10 index. However, theweights used in calculating the Major Currency Index do not result inthe Index reflecting current foreign currency trading patterns in theinternational foreign exchange markets sufficiently to allow the indexto form the basis of desirable futures and options contracts.

Therefore, there is a need in the art for a foreign currency index thatincludes weights that change as conditions change between the U.S. andother countries and that reflects current foreign currency tradingpatterns sufficiently to allow the index to form the basis of desirablefutures and options contracts.

SUMMARY OF THE INVENTION

The present invention overcomes the problems and limitations of theprior art by providing methods and systems that calculate the value offinancial instruments as a function of exchange rates between a group ofcountries and individual competitive weights that each reflectcompetition between the goods of the United States and a given countryin the markets of third countries. The competitive weights maycorrespond to the competitive weights published by the Federal Reserveand that are used by the Federal Reserve to calculate weights used withthe Major Currency Index.

In one embodiment of the invention, a method of calculating thecomposition of a foreign currencies indexed financial instrument isprovided. The method includes determining exchange rates for a group offoreign currencies and determining competitive weights for each of theforeign currencies such that each weight reflects competition betweenthe goods of the United States and a country corresponding to theforeign currency in the markets of third countries. Next, a geometricaverage of the exchange rates with corresponding competitive weights iscalculated.

In one implementation of the first embodiment of the invention, thecurrencies used in the calculation are: the European Union euro, theAustralian dollar, the Canadian dollar, the Japanese yen, the Swedishkrona, the Swiss franc, and the United Kingdom pound.

In another embodiment of the invention, a method of trading a foreigncurrencies indexed financial instrument is provided. The method includeslisting for trading on an exchange a financial instrument having acomposition calculated by the method of the first embodiment of theinvention. Bids and offers for the financial instrument are received andmatched.

In certain embodiments of the invention, the index may be used tocalculate the values of futures and options contracts.

In other embodiments, the present invention can be partially or whollyimplemented on a computer-readable medium, for example, by storingcomputer-executable instructions or modules, or by utilizingcomputer-readable data structures.

Of course, the methods and systems of the above-referenced embodimentsmay also include other additional elements, steps, computer-executableinstructions, or computer-readable data structures. The details of theseand other embodiments of the present invention are set forth in theaccompanying drawings and the description below. Other features andadvantages of the invention will be apparent from the description anddrawings, and from the claims.

BRIEF DESCRIPTION OF THE DRAWINGS

The present invention may take physical form in certain parts and steps,embodiments of which will be described in detail in the followingdescription and illustrated in the accompanying drawings that form apart hereof, wherein:

FIG. 1 shows a computer network system that may be used to implementaspects of the present invention; and

FIG. 2 shows a method of calculating the composition of a financialinstrument in accordance with an embodiment of the invention.

DETAILED DESCRIPTION OF THE INVENTION

Aspects of the present invention may be implemented with computerdevices and computer networks that allow users to exchange tradinginformation. In particular, a trading network environment may be used toexchange and match bids and offers for the disclosed financialinstruments. An exemplary trading network environment for implementingtrading systems and methods is shown in FIG. 1. An exchange computersystem 100 receives orders and transmits market data related to ordersand trades to users. Exchange computer system 100 may be implementedwith one or more mainframe, desktop or other computers. A user database102 includes information identifying traders and other users of exchangecomputer system 100. Data may include user names and passwords. Anaccount data module 104 may process account information that may be usedduring trades. A match engine module 106 is included to match bid andoffer prices. Match engine module 106 may be implemented with softwarethat executes one or more algorithms for matching bids and offers. Atrade database 108 may be included to store information identifyingtrades and descriptions of trades. In particular, a trade database maystore information identifying the time that a trade took place and thecontract price. An order book module 110 may be included to compute orotherwise determine current bid and offer prices. A market data module112 may be included to collect market data and prepare the data fortransmission to users. A risk management module 134 may be included tocompute and determine a user's risk utilization in relation to theuser's defined risk thresholds. An order processing module 136 may beincluded to process orders for further processing by order book module110 and match engine module 106.

The trading network environment shown in FIG. 1 includes computerdevices 114, 116, 118, 120 and 122. Each computer device includes acentral processor that controls the overall operation of the computerand a system bus that connects the central processor to one or moreconventional components, such as a network card or modem. Each computerdevice may also include a variety of interface units and drives forreading and writing data or files. Depending on the type of computerdevice, a user can interact with the computer with a keyboard, pointingdevice, microphone, pen device or other input device.

Computer device 114 is shown directly connected to exchange computersystem 100. Exchange computer system 100 and computer device 114 may beconnected via a T1 line, a common local area network (LAN) or othermechanism for connecting computer devices. Computer device 114 is shownconnected to a radio 132. The user of radio 132 may be a trader orexchange employee. The radio user may transmit orders or otherinformation to a user of computer device 114. The user of computerdevice 114 may then transmit the trade or other information to exchangecomputer system 100.

Computer devices 116 and 118 are coupled to a LAN 124. LAN 124 may haveone or more of the well-known LAN topologies and may use a variety ofdifferent protocols, such as Ethernet. Computers 116 and 118 maycommunicate with each other and other computers and devices connected toLAN 124. Computers and other devices may be connected to LAN 124 viatwisted pair wires, coaxial cable, fiber optics or other media.Alternatively, a wireless personal digital assistant device (PDA) 122may communicate with LAN 124 or the Internet 126 via radio waves. PDA122 may also communicate with exchange computer system 100 via aconventional wireless hub 128. As used herein, a PDA includes mobiletelephones and other wireless devices that communicate with a networkvia radio waves.

FIG. 1 also shows LAN 124 connected to the Internet 126. LAN 124 mayinclude a router to connect LAN 124 to the Internet 126. Computer device120 is shown connected directly to the Internet 126. The connection maybe via a modem, DSL line, satellite dish or any other device forconnecting a computer device to the Internet.

One or more market makers 130 may maintain a market by providingconstant bid and offer prices for a derivative or security to exchangecomputer system 100. Exchange computer system 100 may also exchangeinformation with other trade engines, such as trade engine 138. Oneskilled in the art will appreciate that numerous additional computersand systems may be coupled to exchange computer system 100. Suchcomputers and systems may include clearing, regulatory and fee systems.

The operations of computer devices and systems shown in FIG. 1 may becontrolled by computer-executable instructions stored oncomputer-readable medium. For example, computer device 116 may includecomputer-executable instructions for receiving order information from auser and transmitting that order information to exchange computer system100. In another example, computer device 118 may includecomputer-executable instructions for receiving market data from exchangecomputer system 100 and displaying that information to a user.

Of course, numerous additional servers, computers, handheld devices,personal digital assistants, telephones and other devices may also beconnected to exchange computer system 100. Moreover, one skilled in theart will appreciate that the topology shown in FIG. 1 is merely anexample and that the components shown in FIG. 1 may be connected bynumerous alternative topologies.

FIG. 2 illustrates a method of determining the composition of afinancial instrument in accordance with an embodiment of the invention.The financial instrument may be a foreign currencies indexed financialinstrument that is a function of exchange rates between a group ofcountries and individual competitive weights that each reflectcompetition between the goods of the U.S. and a given country in themarkets of third countries.

A group of foreign currencies may be selected in step 202. In oneembodiment of the invention, the foreign currencies consist of theEuropean Union euro, the Australian dollar, the Canadian dollar, theJapanese yen, the Swedish krona, the Swiss franc, and the United Kingdompound. Of course additional or alternative currencies may be selected inother embodiments of the invention. For example, a new base currency maybe one of the European Union euro, the Australian dollar, the Canadiandollar, the Japanese yen, the Swedish krona, the Swiss franc, and theUnited Kingdom pound and the foreign currencies may include the U.S.dollar and the remaining six currencies. In yet another embodiment, all27 currencies for which the Board of Governors of the U.S. FederalReserve System calculates trade weights may be used. Different financialinstruments may be created by using any one of the 27 currencies as abase currency.

Next exchange rates for the group of foreign currencies are determinedin step 204. Step 204 may be performed by consulting any of theconventional sources of foreign currency exchange rate data.

In step 206 competitive weights for each of the foreign currencies aredetermined. Each of the competitive weights reflects the competitionbetween the goods of the United States and a country corresponding tothe foreign currency in the markets of third countries. In oneembodiment of the invention, competitive weights correspond to thecompetitive weights published by the Federal Reserve and used tocalculate weights used with the Major Currency Index. The competitiveweights published by the Federal Reserve can be found on the Internet athttp://www.federalreserve.gov/releases/H10/weights/. Step 206 may alsoinclude scaling the competitive weights so that the weights sum to 100.The following table illustrates the values published by the FederalReserve for the year 2002 and the corresponding scaled values.

Value Published by Scaled Competitive the Federal Reserve weightEuropean Union 17.816 38.4015 euro Australian dollar 1.977 4.2614Canadian dollar 1.894 4.0824 Japanese yen 15.863 34.1919 Swedish krona1.350 2.9099 Swiss franc 3.346 7.2121 United Kingdom 4.148 8.9408 pound

Of course, in embodiments that do not use the U.S. dollar as a basecurrency, the competitive weights would be determined appropriately sothat each competitive weight reflects the competition between the goodsof the base country and another country corresponding to the foreigncurrency in the markets of third countries.

The competitive weights may also be rounded to four decimal places andadjusted to ensure the weights sum to 100. In accordance with oneembodiment of the invention, if after rounding to four decimal placesthe sum of the weights is greater than 100, the 5th decimal points (whenrounded to the fifth decimal place) of the competitive weights arereviewed and currencies that are eligible for rounding up areidentified. Of those identified, one currency may be selected at randomand an appropriate amount subtracted from it to force the sum of thecompetitive weights to 100. If the initial sum of the competitiveweights is less than 100, the 5th decimal points (when rounded to thefifth decimal place) of the competitive weights are reviewed andcurrencies that are eligible for rounding down are identified. Of thoseidentified, one currency may be selected at random and an appropriateamount added to it to force the sum to 100.

In step 208, a geometric average of the exchange rates withcorresponding competitive weights is calculated. In the examples thatfollow, the competitive weights will be assumed to be scaled and roundedcompetitive weights. In one embodiment of the invention, the geometricaverage may be calculated with the following equation:

$\begin{matrix}{\prod\limits_{i = 1}^{7}\left( {1/S_{i,t}} \right)^{w_{i,t}}} & (1)\end{matrix}$where

$\prod\limits_{k = 1}^{n}\left( x_{k} \right)$is the product of x_(k) as k ranges from 1 to n, S_(i,t) is the exchangerate of currency i at time t, expressed in dollars per unit of foreigncurrency and w_(i,t) is the competitive weight of currency i at time t.

Next, in step 210, the geometric average may be multiplied by amultiplier B_(t). B_(t) is a multiplier that will be calculated everytime the currency weights, w_(i,t) change to ensure index continuity.The calculation of B_(t) is described in detail below.

In step 212, it is determined whether the competitive weights havechanged. When the competitive weights have changed, a new multiplierB_(t) may be determined to ensure the continuity in equation 1, in step214. In one embodiment, B_(t) is determined by the following equation:B _(t) =B _(t-1) ÷b _(t),  (2)where the variable b_(t) can be expressed as

$\begin{matrix}{b_{t} = \frac{\prod\limits_{i = 1}^{7}\left( {1/S_{i,t}} \right)^{w_{i,t}}}{\prod\limits_{i = 1}^{7}\left( {1/S_{i,t}} \right)^{w_{i,{t - 1}}}}} & (3)\end{matrix}$

The Federal Reserve typically publishes revised competitive weights inthe beginning of the calendar year. In one embodiment, the competitiveweights w_(i,t) in equation (1) are adjusted on the first trading day inMarch of every year to provide additional transparency in calculatingthe value of a financial instrument. If the Federal Reserve publishesrevised competitive weights during the year, in one embodiment, thecompetitive weights w_(i,t) in equation (1) are adjusted on the firsttrading day of the second calendar month after the revision.

When the competitive weights have not changed or after step 212, controlmay return to step 204 during a subsequent time period to begin theprocess of determining the value of the financial instrument for thattime period.

The method shown in FIG. 2 may be used to determine the value offinancial instruments in the form of futures and/or options on futurescontracts. In one embodiment, the calculation of the value of thefutures and/or options on futures contracts may be performed by anexchange, such as the Chicago Mercantile Exchange, Inc. The exchange mayalso perform other functions such as listing the financial instrumentsfor trading, receiving bids and offers for the financial instruments andmatching bids and offers for the financial instruments. Conventionalsettlement services for executed trades of the financial instrument mayalso be performed by the exchange. The exchange may also provide noticeof matched trades to traders associated with matched bids and offers.

The present invention has been described herein with reference tospecific exemplary embodiments thereof. It will be apparent to thoseskilled in the art, that a person understanding this invention mayconceive of changes or other embodiments or variations, which utilizethe principles of this invention without departing from the broaderspirit and scope of the invention as set forth in the appended claims.All are considered within the sphere, spirit, and scope of theinvention.

1. A non-transitory computer-readable medium on an exchange computersystem having computer-executable instructions that when executed by aprocessor perform the method comprising: (a) listing for trading on anexchange a financial instrument having a composition calculated by themethod comprising: (i) determining from a data market module of theexchange computer system exchange rates for a group of foreigncurrencies; (ii) determining competitive weights for each of the foreigncurrencies such that each weight reflects competition between the goodsof the United States and a country corresponding to the foreign currencyin the markets of third countries as well as foreign currency tradingpatterns in international foreign exchange markets; and (iii)calculating a geometric average of the exchange rates with correspondingcompetitive weights using the formula:${\prod\limits_{i = 1}^{n}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}},$where n is the number of foreign currencies S_(it) is the exchange rateof currency i at time t, expressed in dollars per unit of foreigncurrency and w_(i,t) is the competitive weight of currency i at time t;(b) receiving bids and offers for the financial instrument at a orderbook module of the exchange computer system; and (c) matching bids andoffers for the financial instrument at a match engine of the exchangecomputer system.
 2. The non-transitory computer-readable medium of claim1, wherein the foreign currencies consist of the European Union euro,the Australian dollar, the Canadian dollar, the Japanese yen, theSwedish krona, the Swiss franc, and the United Kingdom pound.
 3. Thenon-transitory computer-readable medium of claim 1, wherein (a) furtherincludes (iv) multiplying the geometric average by a multiplier.
 4. Thenon-transitory computer-readable medium of claim 3, wherein (iii)comprises using the formula:${\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}},$where S_(it) is the exchange rate of currency i at time t, expressed indollars per unit of foreign currency and w_(i,t) is the competitiveweight of currency i at time t.
 5. The non-transitory computer-readablemedium of claim 3, wherein (a) further includes: (v) calculating a newmultiplier when the competitive weights are changed.
 6. Thenon-transitory computer-readable medium of claim 5, wherein (v)comprises using the formula$B_{t} = {B_{t - 1} \div \frac{\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}}{\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,{t - 1}}}}}$where S_(it) is the exchange rate of currency i at time t, expressed indollars per unit of foreign currency, w_(i,t) is the weight of currencyi at time t, B_(t) is the new multiplier and B_(t-1) is the previousmultiplier.
 7. The non-transitory computer-readable medium of claim 1,wherein the competitive weights are published by the Board of Governorsof the Federal Reserve.
 8. The non-transitory computer-readable mediumof claim 1, further including: (d) providing settlement services forexecuted trades of the financial instrument.
 9. The non-transitorycomputer-readable medium of claim 1 further comprising: (e) providingnotice of matched trades to traders associated with matched bids andoffers.
 10. The non-transitory computer-readable medium of claim 1,wherein the competitive weights are periodically recalculated.
 11. Anon-transitory computer-readable medium on an exchange computer systemhaving computer-executable instructions that when executed by aprocessor perform a method of calculating the composition of a foreigncurrencies indexed financial instrument, the method comprising: (a)determining exchange rates for a group of foreign currencies; (b)determining competitive weights for each of the foreign currencies suchthat each weight reflects competition between the goods of the UnitedStates and a country corresponding to the foreign currency in themarkets of third countries; and (c) calculating a geometric average ofthe exchange rates with corresponding competitive weights using theformula:${\prod\limits_{i = 1}^{n}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}},$where n is the number of foreign currencies S_(it) is the exchange rateof currency i at time t, expressed in dollars per unit of foreigncurrency and w_(i,t) is the competitive weight of currency i at time t.12. The non-transitory computer-readable medium of claim 11, wherein theforeign currencies consist of the European Union Euro, the Australiandollar, the Canadian dollar, the Japanese yen, the Swedish krona, theSwiss franc, and the United Kingdom pound.
 13. The non-transitorycomputer-readable medium of claim 11, further including (d) multiplyingthe geometric average by a multiplier.
 14. The non-transitorycomputer-readable medium of claim 13, wherein (c) comprises using theformula:${\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}},$where $\prod\limits_{k = 1}^{n}\left( x_{k} \right)$ is the product ofx_(k) as k ranges from 1 to n, S_(it) is the exchange rate of currency iat time t, expressed in dollars per unit of foreign currency and w_(i,t)is the competitive weight of currency i at time t.
 15. Thenon-transitory computer-readable medium of claim 13, further including:(e) calculating a new multiplier when the competitive weights arechanged.
 16. The non-transitory computer-readable medium of claim 15,wherein (e) comprises using the formula$B_{t} = {B_{t - 1} \div \frac{\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}}{\prod\limits_{i = 1}^{7}\;\left( {1/S_{i,t}} \right)^{w_{i,{t - 1}}}}}$where S_(it) is the exchange rate of currency i at time t, expressed indollars per unit of foreign currency, w_(i,t) is the weight of currencyi at time t, B_(t) is the new multiplier and B_(t-1) is the previousmultiplier.
 17. The non-transitory computer-readable medium of claim 11,wherein the competitive weights are published by the Federal Reserve.18. A computer exchange system for trading a foreign currencies indexedfinancial instrument comprising: computer-readable medium containingcomputer-readable instructions for performing the steps comprising: (a)a market data module configured to receive exchange rates for a group offoreign currencies and (b) receiving competitive weights for each of theforeign currencies such that each weight reflects competition betweenthe goods of the United States and a country corresponding to theforeign currency in the markets of third countries; and a processorconfigured to calculate a geometric average of the exchange rates withcorresponding competitive weights using the formula:${\prod\limits_{i = 1}^{n}\;\left( {1/S_{i,t}} \right)^{w_{i,t}}},$where n is the number of foreign currencies S_(it) is the exchange rateof currency i at time t, expressed in dollars per unit of foreigncurrency and w_(i,t) is the competitive weight of currency i at time t.